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Think Cost Should Determine Your Pricing? Think Again, Writes David Brown

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Think Cost Should Determine Your Pricing? Think Again, Writes David Brown

The selling price, and ultimately the margin and profit you make from a piece of jewelry, can be a cause of angst for many jewelers. Bottom line — a customer will rarely pay more for an item than they want to.

We have been programmed historically to use a cost-plus basis for determining selling price, and certainly this provides a good benchmark or starting point to determine price. However, cost alone is insufficient in deciding the true value of an item. Firstly, cost is based on inputs — the price of the stone or metal that makes up a ring, for example, and valuations support this basis. However, as all of you who have had an old inventory item sit around for four years will testify, the value to the customer doesn’t always equal the inputs to the construction. Two rings of similar cost to manufacture can sell slower or faster than each other depending on the customer’s perception of their value to them. That makes it difficult to justify them being the same price.

Likewise, two customers won’t value an item the same regardless of the inputs that contribute to the cost. Other factors like their priorities, personal tastes, economic restrictions, and cultural inputs will all affect the amount they would be willing to pay. If you don’t believe me, show 10 customers an unticketed ring and have them tell you what they think it is worth — the variations will be interesting.

So ultimately, the selling price of an item will be determined by factors other than the costs of its manufacturer or purchase price. I am a fan of repricing items up that sell well to determine the best price they should be set at. You have to price them down when they aren’t good sellers, so the opposite needs to also apply. Your customers don’t care about your cost price on an ugly ring that you have to discount to 20 percent below purchase price — likewise, cost isn’t a factor in their decision-making for a fast seller that you have to wait six weeks for between orders.

If you do use a cost-plus approach to pricing, then remember that cost should also consider replacement cost, not just actual cost. If you sell that item today, what is the cost of replacing it now with something equal or similar? Too often, with changes in the cost of raw materials, storeowners are caught short by their pricing. This can reduce the profit you thought you were making on something, especially if the replacement item proves harder to sell.

As mentioned, pricing is an individual choice, but it pays to consider more than just the cost of purchasing inventory when making the decision on selling price. 

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